Financial Mis-selling :: Interest Rate Swaps

If you have been sold an interest rate swap product by your bank and have suffered financial losses as a result, we can help you to bring a claim against the bank. The simple fact that you have been sold an interest rate product does not automatically mean that you have a claim as there are many factors that need to be examined and we will be able to advise you on the strengths and weaknesses of any case that you may have whilst guiding you through the whole process with our professional financial miss-selling team here at My Solicitor Says.

What is an interest rate swap?

An interest rate swap (an 'IRS') is a product that is usually sold to a business in conjunction with a loan. The IRS is meant to act as a form of insurance against fluctuations in interest rates and to provide bank customers with a greater degree of certainty. Used in the right circumstances, they can be a very useful business tool as they provide more predictability with financial planning. If sold to a business without the risks being fully explained, they can also lead to financial ruin.

When an IRS is entered into, the bank and the customer agree to swap the base rate for a fixed interest rate (the term of the IRS usually lasts for the same period as the loan which is being taken out at the same time as the loan). If, for example, an IRS is agreed at 3%, the customer knows that if interest rates rise above 3%, they know that the monthly payments will not increase above 3%. If interest rates go to 5%, the customer only has to pay 3% and the bank meets the balance of 2% that is required. From the bank's point of view, if interest rates stay below 3%, then it benefits from the customer paying more in interest than they would have to if they were not tied in to the IRS.

Interest rates have been at an all time low and have remained at less than 1% for far longer than anyone would have predicted. This means that those businesses that were tied into IRS agreements with banks have been paying over the odds for several years. Already faced with the difficulties of the recession, the IRS has in many cases served to make matters much worse.

What types of interest rate swap are there?

Such arrangements come in many shapes and sizes. They are often complex financial products that require a great deal of experience and skill in the financial markets to minimise risk. They are often not appropriate for small to medium sized businesses ('SME's) that the banks have been dealing with. To give an idea of the scale of the marketplace, in 2009, it was estimated to have a value of around $14 trillion.

The types of IRS that are likely to have been sold to SMEs in the UK are fairly limited and usually fall into one of 4 categories:

(1) a swap (as discussed in the example above)

(2) a cap, where a limit is placed on any interest rate rises.For example,

(3) a collar, which allows a customer to limit the interest rate changes to within a certain band

(4) a structured collar which allows the customer to limit the interest rate change within a certain range but with the additional catch that if interest falls below a certain level, the customer ends up paying even more